Question

With the onset of the coronavirus pandemic, Jerome Powell, the head of the U.S. Fed, decided to step up the Fed’s purchases of bonds to unprecedented levels.

a. Using wealth portfolios, symbols, and diagrams (that are neither especially Keynesian or Classical) illustrate the effect of the Fed’s purchase of short-term bonds would have on the money market, the bonds market, the level of investment, and the levels of real output in the U.S. economy.

b. But many financial observers worry about the effect of a flight to cash even from holders of relatively liquid assets such as money market mutual funds and the anxiety that banks and corporations feel about an increasingly uncertain economic future will have on the effectiveness of the fed’s policy.

Using a money market diagram, an investment schedule, and an IS/LM diagram illustrate and explain the likely effect of those conditions on the effectiveness of the Fed buying bonds.

Answer 1